Behavioral Economics: Past, Present, and Future

1588
THE AMERICAN ECONOMIC REVIEW
july 2016
of Apple, we can say for sure that odd-numbered share certificates 
(if such things 
still exist
) should sell for the same price as even-numbered shares. I have explored 
several such examples in work with Owen Lamont,
7
 and he recently told me about 
another one that I will describe here.
One type of security that has provided a fruitful source of tests of the law of one 
price is closed-end mutual funds. Unlike their open-ended cousins, which accept 
new investments that are valued at the net asset value of the securities held by the 
fund, and then redeem withdrawals the same way, closed-end funds are, as their 
name suggests, closed to new investors. Rather, when the fund starts, a certain 
amount of money is raised and invested, and then the shares in the fund trade on 
organized markets such as the New York Stock Exchange. The curious fact about 
closed-end funds, noted early on by Graham 
(1949) among others, is that the price 
of the shares is not always equal to the net asset value of the underlying securities. 
Funds typically sell at discounts of 10–15 percent, but sometimes sell at substantial 
premia. This is the story of one such fund.
The particular fund I want to highlight here happens to have the ticker symbol 
CUBA. Founded in 1994, its official name is the Herzfeld Caribbean Basin Fund, 
which has 69 percent of its holdings in US stocks with the rest in foreign stocks, 
chiefly Mexican. It gave itself the ticker “CUBA” despite the fact that it owns no 
Cuban securities nor has it been legal for any US company to do business in Cuba 
since 1960 
(although that may change at some point). The legal proviso, plus the 
fact that there are no traded securities in Cuba, means that the fund has no financial 
interest in the country with which it shares a name. Historically, the CUBA fund 
traded at a 10–15 percent discount to Net Asset Value.
Figure 1 plots both the share price and net asset value for the CUBA fund for a 
time period beginning in September 2014. For the first few months we can see that 
the share price is trading in the normal 10–15 percent discount range. Then some-
thing abruptly happens on December 18, 2014. Although the net asset value of the 
fund barely moves, the price of the shares jumped to a 70 percent premium. Whereas 
it had previously been possible to buy $100 worth of Caribbean assets for just $90, 
the next day those assets cost $170! As readers have probably guessed, this price 
jump coincided with President Obama’s announcement of his intention to relax the 
United States’ diplomatic relations with Cuba. Although the value of the assets in 
the fund remained stable, the substantial premium lasted for several months, finally 
disappearing about a year later.
This example and others like it show that prices can diverge significantly from 
intrinsic value, even when intrinsic value is easily measured and reported daily. What 
then should we think about broader market indices? Can they also get out of whack? 
Certainly, the run-up of technology stocks in the late 1990s looked like a bubble at 
the time, with stocks selling for very high multiples of earnings 
(or sales for those 
without profits
), and it was followed by a decline in prices of more than two thirds 
in the NASDAQ index. We experienced a similar pattern in the housing boom in the 
mid 2000s, especially in some cities such as Las Vegas and Phoenix. Prices sharply 
diverged from their long-term trend of selling for roughly 20 times rental prices, 
7 
See Lamont and Thaler 
(2003a, 2003b). 

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